Canadian Institute of Actuaries L’Institut canadien des actuaires 2009 Annual Meeting ●Assemblée annuelle 2009 Halifax, Nova Scotia ● Halifax (Nouvelle-Écosse)
ERM and the Role of Actuaries –A Global Credential Harry Panjer, MA, PhD, FSA, FCIA, HonFIA, CERA Professor Emeritus University of Waterloo, Canada
Definition of ERM “ERM is the discipline by which an organization in any industry assesses, controls, exploits, finances and monitors risks from all sources for the purpose of increasing the organization’s short- and long-term value to its stakeholders” (Casualty Actuarial Society)
Who are the players in ERM? • Banks’ and insurers’ management and boards • Bank and insurer regulators • BIS, BCBS • IAIS • national regulators of banks and insurers • Professional groups • Auditors, actuaries, other risk professionals • Rating agencies • Fitch, Moody, S&P, etc
Regulator Investor Rating Agency
CEO with stock options Investor Regulator Rating Agency
Regulator Investor CEO with stock options Rating Agency CRO
Regulator Investor CEO with stock options Rating Agency CRO
Three advances in the past decade 1. Acknowledgement of risk 2. Measurement of risk 3. Communication of risk
1. Acknowledging Risk: Development of the CRO • Recognition of ERM by rating agencies has caused managements of traded companies to focus on risk exposure. • Recognition of enterprise-wide risk has become an increasing part of governance of financial institutions. • The senior management point person for risk: the CRO.
2. Measuring Risk: Economic Capital • EC – the amount of capital required to sustain losses at a given risk tolerance level over some horizon • EC – a common metric that attaches the cost of risk to strategic initiatives • ERM adds value by exploiting risk by recognizing interdependencies in contrast to many regulatory capital regimes • This must be translated into a more efficient decision-making about capital usage
3. Communicating Risk: ERM Dashboard • Key communication tool to management • Highly customized • Increases transparency • Leverages existing infrastructures • Integrates disjoint data • Drills into details on a click • Allows real-time assessment
Evolution of ERM Link with strategy Return optimization High Strategic integration Risk management Risk measurement Medium Loss minimization Compliance Low Risk control Balance sheet protection Value creation Risk/return optimization Today Industry standard in the last 5-10 years Industry standard in the next 5-10 years
Issue was raised at the IAA Financial Risks Committee in 10/2006 in Edinburgh Decided to put it on the agenda for Mexico Harry Panjer agreed to draft an issues brief The subject was added to agenda at Presidents Forum at every meeting since then Fred Rowley (Australia) and Harry Panjer (Canada) agreed to have discussions with representatives of a few associations to see if there was sufficient interest to proceed. Eight associations agreed to develop the concept A global credential for actuaries?
Financial and Enterprise RM is a rapidly growing field of activity for actuaries and other risk professionals. Most large financial institutions have a CRO and a team devoted to ERM. Two associations (GARP and PRMIA) were created to organize risk professionals and certify them with credentials (FRM, PRM). They have members world-wide and are seen as global players. Established associations (e.g. CFA Institute) are also seen as providing professionals. The actuarial profession has been less visible to the buyers of FRM and ERM services (although numerous individual actuaries have become prominent). The global risk management environment
The profession is competing in this marketplace: Many actuaries are already CROs in insurance companies; but many are not. CROs of other financial institutions could be actuaries. Actuarial methods are used by other professionals RM in investment banks already (e.g. credit risk, credit derivatives, operational risk). Basel II, Solvency II and other solvency initiatives create market opportunities for actuaries. The global risk management environment
A single credential with a corresponding set of letters that is widely recognized by buyers of RM services and widely accessible by persons who want to acquire the designation. For example, a person being an FCIA could also hold the global credential. It has no ‘national’ connotations. This is in fundamental contrast to how we now credential actuaries. Questions: Do global credentials have an advantage over local credentials? If so, how can the actuarial profession have a global RM presence without undermining its existing strengths? What is a “global” credential?
Develop a credential around a core body of risk management knowledge. With appropriate standards for achievement of the designation. A group of actuarial organizations act as “sponsors” of the designation. Allow each sponsor to determine how the standards are met; e.g. examinations, courses of study. The working model
Syllabus development • Syllabus working group chaired by Harry Panjer • One representative of each of the 8 organizations • Zero-based syllabus development • What does an ERM specialist need to know? • At what depth? • What does an ERM specialist need to be able to do? • At what level of sophistication? • Representative syllabus materials listed • Comparisons with SOA’s recently developed CERA • Relationship with IAA syllabus
IAA syllabus + the following topic areas: • ERM concept and framework • Structure of the risk management function in an organization • What constitutes good risk management practice • Reporting of risk exposures • Risk types: market, credit, operational, business, etc • Modeling tools including extreme value theory • Aggregation of risks including copulas • Risk mitigation techniques • Risk measures • Economic capital
Qualities of an ERM professional - 1 Expertise in all aspects of Enterprise Risk Management including a thorough understanding of: • the concept of ERM • the drivers behind ERM – governance, regulation, improvements in understanding of risk and techniques for measuring and managing risk, enterprise value protection and creation etc • practical aspects of ERM, including all elements of a robust risk management framework and its operation, and critical success factors • standards and good practice in use around the world • the different types of risk – financial, insurance, operational, and strategic • the quantification of risk, including tools and techniques and supporting mathematics • practices and techniques for the management of risk, including control, mitigation, transfer, avoidance, and exploitation of risk opportunities • the economic value added by sound ERM • important regulation and regulatory capital requirements
Qualities of an ERM professional - 2 An ERM risk professional should be proficient at the following tasks: • Independently develop reasonable models to quantify risk by type and in aggregate • Parameterize the models appropriately • understand when historical data is applicable • know when and how to apply current values • Be able to apply informed judgment • Run the models to obtain relevant results • be able to focus on the key metrics • select appropriate number of iterations • be able to update the model as necessary • Explain the models and the results to a variety of audiences • other technical ERM experts • managers of specific types of risk • individuals such as the CFO, CEO and board members
Final Observations • ERM is here to stay • There is still much to learn about modeling • Economic capital is a key measurement • ERM is good for corporations • ERM can be applied to any business • Insurers and banks are at the forefront • Actuaries have the skill set to be ERM professions